Former American Airlines CEO Bob Crandall Says Airline Deregulation and Mergers Were Wrong

Skift interviews former American Airlines CEO Bob Crandall. Crandall thinks that the airline industry should never have been deregulated (1978) and the recent round of airline mergers (2008-2013) should never have been allowed.

Crandall is wrong on both counts, though acknowledging that is not at all a defense of the airline status quo today.

No, Airline Deregulation Wasn’t a Mistake

Crandall was opposed to airline deregulation when Senator Ted Kennedy and Ralph Nader pushed for it and Jimmy Carter signed it. Most of the US airline industry was against it (except for United and Frontier). That’s because airline regulation benefited incumbent airlines and was bad for consumers.

The Civil Aeronautics Board had as its mission ensuring the profitability of airlines. The federal government decided which airlines flew where, and what prices they charged.

Airlines couldn’t just expand service. They were forbidden from competing on price. It wasn’t until 1976 that they began ‘experimenting’ with price competition to see what would happen if fares became accessible to more people.

Whenever people complain about the airlines it’s common to suggest it ‘would have been better’ if the airlines were never deregulated, but usually that means wishing for regulation of whatever one doesn’t like about airlines. In other words it ignores the reality of what airline regulation actually was, and how it was bad for consumers and good for airlines at the expense of consumers.

Of course when an entire industry develops over 50 years of regulation, there’s going to be upheaval when competition is introduced. Think about Russia under Yeltsin after the collapse of the Soviet Union and that’s just about what happened in the industry. The transition was rough.

The federal government built in some transition payments, subsidized air service that was supposed to be temporary but proving the old adage that there’s nothing more permanent than a temporary government program. Spending on Essential Air Service has quintupled over the last 20 years.

The Problem is Lack of Startups Not Too Many Mergers

Crandall says he never would have allowed any mergers. Ever. In any industry,

“Every consolidation that occurs in every industry is accomplished for one purpose, and that is to reduce competition,” Crandall said. “So, if I was the king of Spain, I wouldn’t permit any acquisition of any company by any other company.”

He says mergers are bad for workers. But what would have happened at US Airways if America West hadn’t taken over? They were in their second bankruptcy of the decade.

To be sure some of their route network would have seen other airlines enter the fray. In such a highly unionized industry though workers would have been worse off. (To be sure the Nicolau arbitration ruling treated legacy US Airways pilots as having come from a failed carrier and losing much seniority but that wasn’t ever implemented.)

Was Northwest Airlines viable as a standalone carrier post-bankruptcy? Would it have survived the Great Recession?

I think that mergers often fail to deliver on their promise, but that alone isn’t a reason to bar mergers. The problem is where the number of players can almost only be reduced. Foreign airlines can’t own US carriers and compete in US markets, taking many of the potential owners and operators off the table at the outset. And new entrants can’t get access to the gates at congested airports legacy carriers have locked up.

I absolutely wish we still had a standalone Northwest Airlines, a Worldperks frequent flyer program, and their website for booking partner awards and that’s without romanticizing their product or employee morale in the least. I absolutely wish American survived as a standalone carrier, although it was clear 18 months before the merger was finalized that this was not going to be an option. The federal government through the Pension Benefit Guaranty Corporation was against it.

And Crandall’s point about small cities losing service through consolidation is true to some extent, it was the predicted and predictable result of the requirements the federal government imposed on the American-US Airways merger.

Crandall may not like mergers, and I don’t either, but in the case of American-US Airways the government’s legal case wasn’t strong. The government didn’t even have the leverage to extract very many concessions because American prevailed in seeking an expedited trial.

Mergers and protection of incumbents is a problem. Of course the pre-deregulation regime existed to protect incumbents from competition.

We Need More Competition, Not More Regulation

Crandall complains that there’s nothing “particularly striking” about airline innovation today. There’s not a lot of room for innovation.

  • Airports in the U.S. are largely government-owned
  • Security checkpoints are almost exclusively run by the government
  • From the moment a plane pushes back to the moment it’s towed into the gate control over the aircraft is handed over to the government
  • Minor tweaks to aircraft require expensive certification

Some of that may well be to the good, but it’s not surprising at all that we don’t see much innovation in air travel. Pointing out the things that are innovative will just underscore the point, since they’re relatively weak sauce.

If an airline wants to start competing, they generally can’t get access to gates at major airports. Incumbent carriers make deals with government entities running airports to hold onto gates into the future even after the expiration of leases and preclude new entrants into the marketplace. And airlines frequently push back against expansion, just as British Airways is doing at London Heathrow. Politicians at the federal level conspire here too, while airlines fight over whether Southwest should control 16 or 18 of 20 gates at Love Field, the federal government is the one that required reducing the number of gates there from 32 to 20 in the first place.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I shall differ from your point-of-view, if only slightly. There is a time when government regulation is NECESSARY. How many more people would die in plane accidents if the FAA did not mandate the “3-Minute Rule” (all pax off the aircraft in three minutes or less). That’s an obvious one, but you get my point. Fare deregulation? Fine. But some regulations and minimum standards are essential for pax safety.

    On the subject of subsidies for small markets…yes, well, you’re right: nothing is so permanent as a temp. gov’t program. That said, I get “hosed” every time I flew into Santa Barbara (e.g.). I could buy a r/t on UA for $450, or fly WN for $49 each way, rent a car and drive from LAX to Santa Barbara — probably faster than flying, if you count the time spent in the airport prior to take-off. Too bad the subsidies weren’t for airfare!

  2. We need more competition AND more regulation. The old airline regulations were damaging because they were regulations protecting the airlines from competition rather than protecting the passengers. Passenger safety just isn’t something that you should leave up to the free market. Seat densities are an area where I’d like to see the government start getting involved as they’re getting the point where seats are just going to get smaller and closer together until someone draws the line. I’m sure the current configurations probably already violate OSHA standards for ergonomics and preventing worker injury but since nobody really regulates airline seats passengers are left to break their backs for hours sitting in Economy-.

  3. @Dug Really? We need “those wicked foreign carriers” to be able to operate in the US. That would certainly generate some competition. Emirates running A380s JFK-LAX? Either open the market up or regulate it, picking some spot in between kills both sides.

  4. To the extent that the legal case against the US/AA merger lacked merit, then the legal standard for merger approval is insufficient to protect consumers. But if the case was weak, then it is hard to attribute the settlement to political pressure.

    Why was the Obama administration in favor of the US/AA merger? What did it get out of it? Probably campaign contributions from the airlines, which shows the corruption inherent in the US campaign finance system. (We look down our nose at the corruption in many second- and third-world countries while closing our eyes to the rampant corruption here.)

    In my quick read, perhaps the key factor in gaining administration support and getting the merger approved was the support of the unions at AA. It would have been hard for the dems to go against strong union opposition. The AA FA union head was an outspoken merger supporter. She later joined AA as a consultant and now works for the FAA the last I heard. The wage increase AA gave the unions without any negotiation may have been a reward for their support.

    Also, after approving the NW/DL and CO/UA mergers, it would seem unfair to deny the AA/US merger. Mergers can have competitive advantages where they allow a new entity to achieve the scale and scope to compete with larger rivals. That may have been one of AA’s arguments vis-a-vis the new DL and UA. It is one of the benefits of the AS/VX merger. I’d argue that it would promote competition to permit AS to merge again, hopefully with a carrier that could allow the new entity to compete nationally.

  5. @Ray: Seat densities are an area where I’d like to see the government start getting involved as they’re getting the point where seats are just going to get smaller and closer together until someone draws the line. ”

    Passengers will. They will avoid seats they don’t like. Right now, the value proposition is drawing them in. Passengers loads are at or near records and fares at or near record lows in real terms.

    Nirvana.

    Are these seats to your taste? Not at all. Me neither. But it’s only a 3 hour flight.

  6. @Gary: ““Every consolidation that occurs in every industry is accomplished for one purpose, and that is to reduce competition,” Crandall said. “So, if I was the king of Spain, I wouldn’t permit any acquisition of any company by any other company.””

    We can go further than that. Every entrepreneur wants to be a monopolist. There are not free market entrepreneurs and monopoly entrepreneurs, that is a misnomer. It is the market that keeps them from succeeding. Crandall wanted to keep the market out of the airline industry and keep it the cushy little oligopoly that it was. He lost.

  7. A lack of startups may be a problem where you live, but it certainly isn’t in California or Silicon Valley. Crandall, as usual, is right: deregulation allowed the system to be rigged.

    In any case, when the best US airline is ranked a dismal #47 by customers polled by Skytrak, the evidence says that the system is an utter failure.

  8. What I think we need is…wait for it…more and better infrastructure investment. If we brought the quality of our airports and transit systems connecting those airports to our population centers up to levels that are globally competitive, we’d lower the barriers to entry for new competitors, while benefiting the legacies as well.

  9. Be careful about what you wish for with more competition. It can have unintended consequences. In the airline industry, more competition now almost always comes in the form of ultra low cost carriers. And that is because what the travelling public actually wants when they buy a ticket is a very low fare. The result of such competition is lower fares AND worse, bare-bones service. When I read public comments, it is obvious that these lower fares don’t actually make most consumers happier (even if they buy the cheap tickets). When they actually fly, they psychologically prefer better service, even if it costs more. But it doesn’t change their buying habits.

    Personally, I don’t want more competition. I would prefer that an airline like Frontier fail. Yes, it will mean that I’ll have to pay more to fly, but I think I’d be better off. Others would disagree.

  10. @chopstck ” When I read public comments, it is obvious that these lower fares don’t actually make most consumers happier”

    If they weren’t the optimal choice then people wouldn’t buy them.

    This is 90% of consumers that you are talking about.

  11. One of the things not addressed by anyone in this post was Bob Crandall’s discussion regarding the “inequality” that has taken root in our now cartelized skies.

    By this, and for those who have yet to read the Skift interview, Crandall was referencing the lowest common denomiator (aka product degradations/“Race to the Bottom”, etc.), where as we all know, the emphasis is on ripping out value, charging the same for less “value” in return for the same amount paid (aka “Basic Economy” plus other “shades of gray” in between where one buys a standard/“regular”/“main cabin” economy fare, but then faces additional fees for 3/4ths of the available aisle/window seats even in the standard pitched rows), plus all of the other ancillary fees that multiply like exceptionally fertile rabbits with each passing year to keep the Wall Street Bullies…er “Analysts” happy (btw: call me crazy, but I always understood the words “Research” and “Analyst” as referencing searching relentlessly and fearlessly for data and facts, analyzing what’s found for certainty as if one would for science and/or mathematics, and then merely being a neutral reporter – NOT stone cold, soulless vampires seeking to suck dry any sense of humanity, deceny and respect for consumers/flyers. But hey, that’s just me!), which was, in fact one of the key issues noted by Crandall when he states the principal beneficiaries of deregulation in an era of excessive consolidation, aka Oligopoly, is, using his words, “capital” (where he is specifically referencing the obscenely large stock buy backs that transfers wealth disproportionately to shareholders and top executives that is being extracted from beleaguered flyers who with each passing year are, in fact, paying more for less when the fares stay the same or increase nominally, but their either paying the same for a “Base”/“Basic Fare” that has stripped out nearly all other added value, or paying the same for a “standard”/“main cabin” fare, but some elements, even if “included” like advance seat selection, only allow for the least desirable seats for “free”, with everything else costing more.

    Of course, the other aspect Crandall cites as the rampant inequality in our desperately lacking competitive skies, is how employees, who were forced to give back so much during the bankruptcies that took place among all of the remaining “Big Three” oligopolists…er legacy/network carriers…on both sides of the merger equations for most (e.g., Delta-Northwest, etc.), have yet to share in the bounties, all while watching year in and year out as many billions of dollars are allocated to obscenely generous stock buybacks.

    Oh, and speaking of share buybacks, those were outlawed until Ronald Reagan’s presidency – just a quick side note on that!

    And whether Crandall is right, or wrong, on deregulation, we can all debate the pros and cons of deregulation, or what’s now needed to address the things he is correct about:

    1.) The system is broken and there is excessive concentration by just a handful of carriers who are now clearly abusing their dominance with a great many selling/pricing practices, product degradations and overall behaviors that in the years since Dougie P tookover American has only accelerated and worsened, and which absolutely matches the criteria of cartels and oligopolies;

    2.) There is a shameful and immoral inequality resulting from the cozy cartel Oligopolists’ club in the the only “competition” that now exists is which airline can screw its passengers and employees better – and get away with it.

    Exactly what one would expect to see when a handful of companies know there’s more than enough demand for them all to carve up markets (fortress hubs, regional predominance) and then divvy up the spoils among themselves without fearing either the emergence of viable new entrants to take them on, or governement stepping in to reel in the most egregious excesses as is the case now.

    Of course, this will all inevitably change once passengers get fed up (or worse, the all but predictable carnage from a densified plane wakes everyone up from their slumber 🙁 ).

    The question is not if things will change, but rather only when? Or what the catalyst is – too much predatory abuse in the form of hidden fees, too small loos or even more fees than the too many ridiculous one that exist now?

    Or of course, a tragedy when it becomes clear that computer simulations using criteria from the dawn of the jet age (essentially the stone age in terms of knowledge, safety standards, heights, weights, demographics, etc.) to determine the safe evacuation of an aircraft in a sudden emergency are woefully deficient when subjected to the brutal realities that no computer simulation can possibly predict with 100% accuracy given what we already know from “near misses” when passengers, right or wrong, grabbed personal possessions before evacuating planes.

    The margin of error is very slim as it is, and like it or not, humans being humans will do things that on an overcrowded, densified plane, we have yet to determine using real world tests, with real humans, in aircraft cabins as they would be how we now fly (stuffed to the gills with carry on bags; an obstacle course of charging/usb cables and/or earbuds stretch across seat rows; laptop computers and other personal devices possibly breaking away from seatback holders and becoming loose objects that can strike passengers during the moment of impact, and then being an added obstacle course as passengers need to rush to emergency exits, etc.).

    So, when that catastrophe happens (as unfortunately, the possibility is all to real), then that for sure would bring about change.

    It really is sad that we always have to wait until the worst happens before we’re willing to accept that most regulations actually were the product of disasters that already happened.

    Kind of like how we wait until someone is killed at an intersection everyone knew was a disaster waiting to happen, and only when there’s a corpse (or few), the long ago needed stop sign or traffic light is finally installed.

    Anyhow, just seasons change, and the ebb and flow of high and low tides, so, too, will this ridiculous oligopoly in our skies meet its well deserved death.

    It really is just a question of when? And the catalyst itself…

    Since, of course, more and more experts, and now including one of the foremost experts who was the Chairman and CEO of an airline that was very successful during his tenure, all agree that our airline industry is an Oligopoly that is desperately lacking competition, and all but a small, but alas, very vocal few, agree, that’s so NOT a good thing.

    And when considering where we were even six months ago on this discussion, the fact that more and more experts from academia, journalists and now industry itself agree the lack of competition in our skies is a problem, means we’re now that much better off than we were even two days ago.

    Because if a captain of the industry is saying there’s a problem, and a distinguished captain at that as most agree Bob Crandall is, then it becomes increasingly hard for those who would insist otherwise to keep spreading their self-serving falsehoods.

    And that’s a very good thing, and progress itself in this day and age, indeed!

  12. The bottom line is that the majority of the airline PAX only fly once or twice a year and the majority of these will shop for the lowest fare with little consideration for anything else. Even if they had a bad experience on (Allegiant, Spirit, Frontier, Ryanair, EasyJet, etc.) last year, they will not remember it or care as long as the fare is cheap. Even safety concerns (Allegiant) will not dissuade these PAX from buying the cheapest fare.

  13. So, Crandall said:”Crandall said. “So, if I was the king of Spain, I wouldn’t permit any acquisition of any company by any other company.” Well, we are safe there, since the King of Spain can do no such thing.
    According to him, in real dollars today, the price of airfare would have been unreachable to most. Competition. Just like the mafia splitting up the country. Southwest, who?
    Go back to sleep.

  14. Jake said- “In any case, when the best US airline is ranked a dismal #47 by customers polled by Skytrak, the evidence says that the system is an utter failure.”

    To the customer it is a failure. To the airline, that’s profits.

  15. @Alan L zelt: Skytrak may improve your golf game, it has absolutely nothing whatsoever to do with air travel.

    Are you in the right blog?

  16. @L3 —> “If they [lower fares] weren’t the optimal choice then people wouldn’t buy them. This is 90% of consumers that you are talking about.”

    Define “lower fares.” If you interpret that phrase as meaning fares like (e.g.) $439 r/t to Europe, then yes. Fares today ARE less expensive than fares were (adjusted for inflation). I don’t think anyone would disagree with that. OTOH, if you are referring to Basic Economy fares, than I’d have to ask you for a cite re: the 90 percent.

    I do not claim that no one is buying BE, but…no one *I* know is, or will. (Tiny microcosm in a world of millions of people.). Plus, there have been numerous articles published relating the fact that UA and AA are losing money on BE — enough so I would tend to believe them.

  17. @Jason Brandt: “I do not claim that no one is buying BE, but…no one *I* know is, or will. (Tiny microcosm in a world of millions of people.).”

    In Europe, ULCCs are over 60% of the seats already (and still increasing). That is where domestic U.S. service is headed.

    To see the trend: Can you name a domestic airline that has increased coach legroom in the last five years? Me neither.

    Ryanair is the end point.

  18. @L3 —>. I would refer you to today’s post on this very site:

    https://viewfromthewing.boardingarea.com/2018/07/26/confirmed-american-bringing-back-carry-on-bags-to-basic-economy-punishing-customers-is-bad-business/

    /\/\/\/\/\/\/\/\/\/\

    Now, as for European ULCC’s, I don’t find the comparison as easy as “apples-to-apples.” Indeed, I don’t think they’re equal at all. Europe, and Europeans, are different the the US and Americans. For example, flights within Europe feature a *lousy* Business class product — far worse than any J class product offered on any domestic (US) metal; after all, you’re still in a Economy seat, with Economy pitch and width — only the middle seat is blocked. What’s the difference between the and simply having an empty middle seat in the row. (Oooh, a convenient “table” across B and E.). You think any US airline has plans for that in the future?

    In terms of Basic Economy (BE), you have American “backing off” their carry-on ban as of September 5th, thus “improving” BE and copying DL rather than UA.

    In terms of pitch, let’s not forget that AA was talking about reducing it to 29″ before they backed off to 30″. Ryanair is 30″. But (e.g.) Spirit on the A319s and A320s are already down to 28″, as is Frontier and some Iberia planes. Ryanair is still at 30″ — why isn’t Spirit the endpoint? (BTW, Allegiant is the odd one out re: US-based ULCC’s, staying at 30″.)

    Well, perhaps, it’s because — at 17.75″ wide — Spirit has seats wider than AA, DL, UA, and most other US-based carriers. (No legroom, but people can fit their fat a$$ in the seat?). So, too, Frontier, but they’re at 18″ width. Or perhaps it’s because Spirit only flew 24.4M pax in 2017, versus 157.7M for Southwest (ranked #4 in total pax, but is in fact #1 in domestic travel), nearly 6.5x the number Spirit has flown¹.

    _______________
    ¹ Just for the sake of comparison, in 2017 Frontier flew approximately 16M, while Allegiant, 12.1M. That said, Hawaiian — despite its “captive market” — only flew 11.5M passengers, leaving only Sun Country following behind at 2.1M.

  19. @Jason Brandt: They have tweaked BE a few times and I expect this to continue (the article is actually wrong in saying that this was the most draconian restriction of BE. That was, and still is, no seat assignment). Nothing fundamental has changed.

    Also, the Spirit seat width did not change the number of seats in a row, so no trade to more room that cost a single seat from the seating plan. Nothing fundamental there either.

    I don’t really mind which airline is the closest representation of the endpoint. My reference to Ryanair is because it is as good an example as any, an established carrier (not an experiment — Norwegian style), wildly popular (largest in Europe by no. of passengers). Spirit would work too, but they may not be around through the next recession. Ryanair is hugely profitable and will be the last one to fall.

    So your post is essentially a list of a set of inessentials. The important thing is that domestically ULCCs will become the norm with a few lie flat seats on transcons, and a migit-sized business class for the few that are willing to pay the 100%+ premium.

    What AA is doing is getting with that (customer-driven) program.

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